Why Vietnam’s latest privatization push may succeed

After years of stop-and-go efforts at privatizing its state-owned enterprises, Vietnam's latest push appears set to successfully offload some shares and boost its stock market.

The fresh move came last week as the government ordered its wealth fund, State Capital and Investment Corp. (SCIC) to sell stakes in 10 companies, including Vinamilk, the country's biggest listed company.

Analysts expect the sales to take place next year with the divestments expected to raise more than $3 billion.

"Vinamilk is the one stock that everyone wants to own in Vietnam," Kevin Snowball, CEO of PXP Vietnam Asset Management, said last week. "That will command a premium price."

The government is planning to sell its 45 percent stake in Vinamilk and scrap the foreign-ownership limit on the stock. Vinamilk's long-full 49 percent foreign-ownership limit means foreign investors pay a premium of around 17 percent over what local investors pay to own the shares, Michael Kokalari, an analyst at CIMB, said in a note last week.

While this effort will likely prove popular, the government's previous efforts to exit state-owned enterprises haven't gone swimmingly. That's why the government is turning to selling stakes in already-listed companies to help fund its budget deficits, Snowball said.

Usually, "the problem with privatization is they want to obtain premium prices for things no one knows anything about," Snowball noted. "There hasn't been the level of transparency and company valuation foreign investors are looking for."

For example, the government's attempt to privatize Vietnam Airlines late last year was broadly disappointing. In November of last year, Vietnam Airlines raised around $51.3 million in an initial public offering planned since 2008. It attracted little interest. Not only was the offering only around 3.5 percent of the company, but the bulk was purchased by two Vietnamese banks, with no foreign institutional investors participating. The shares are expected to begin trading on the stock exchange by the end of this year.

However, analysts say this latest effort, combined with plans to raise the ceiling or eliminate limits on foreign ownership of companies, likely next year, are set to give the market a fillip.

"This would clearly be positive to market accessibility," analysts at Credit Suisse said in a note last week. "SCIC's exit from listed companies would increase tradeable shares and market activities. This, if combined with an increase in foreign-ownership limits, could lead to a significant increase in foreign participation."

There's one big reason the government is motivated to succeed at selling stakes this time: it needs the money.

"The only major risk to Vietnam's economy/stock market is the country's increasing government debt-to-GDP (gross domestic product) ratio, fueled by a consistent 5-6 percent/GDP budget deficit in recent years," Kokalari said.

The country's public debt was around 61 percent of GDP, the country's prime minister, Nguyen Tan Dung, said, according to a Reuters report earlier this week. But local media cited data estimating the 2014 level was closer to 66 percent of GDP, after including state-linked entities' loans with government guarantees.

The debt is likely to become more burdensome ahead: the country's currency, the dong, has lost around 5 percent of its value against the dollar so far this year, making it more expensive to service dollar-denominated debt.